Small Business Owners Turn to Alternative Lenders

Some small business owners seeking access to capital appear to be shifting away from banks and turning to faster, more flexible alternative lenders. These are typically online companies such as OnDeck or Kabbage that offer financing based more on a business’s performance rather than personal credit.

According to a recent SurePayroll survey of small businesses with 1-10 employees, less than half (45 percent) of small business owners plan to use a bank for loans going forward; 36 percent will use alternative lenders; 7 percent will go to friends and family; and 12 percent will use personal credit cards.

This is a strong shift based on our results, as two years ago only 13 percent went to a non-bank lender; 62 percent went to a bank; 14 percent went to friends and family; and 11 percent used personal credit cards.

Now more than ever, small business owners want things to be easy. They want to move swiftly. And in most cases, what used to take weeks or months can now be done almost instantly online.

Approval Rates

According to the latest Biz2Credit Small Business Lending Index, the approval rates at alternative lenders are above 60 percent, three times that of big banks, even as those big banks have steadily increased their approval rates.

Now more than ever, small business owners want things to be easy. They want to move swiftly. And in most cases, what used to take weeks or months can now be done almost instantly online.

If our survey results are any indication, small business owners expect no less from the process of getting a loan.

Why the Alternatives are Attractive

When you look at the websites of alternative lenders, they’re slick and easy to use, with slogans like “Business loans without the hurdles” and “Fast, flexible funding at your fingertips.” Part of the review process for lenders like these includes nontraditional methods like checking out a business’ Yelp page, as opposed to looking just at a credit history.

According to our survey, 86 percent of those small business owners who’ve used non-bank lenders had a good experience and would use them again.

As a payroll provider catering primarily to small businesses with 1-10 employees, we know that small businesses are using technology and productivity to grow revenues. And 41 percent are telling us they’re on pace to beat revenues from 2013.

Hiring, however, has been flat to slightly down for these companies over the past year. These trends indicate that, in the absence of more staff, small business owners are increasing productivity by being fast and flexible, and avoiding hurdles — making things easier. Non-bank lenders are offering that speed and flexibility when it comes to getting a loan.

The Risks

The rub against alternative lenders is that they come at a higher cost. Quick approval for a cash influx usually comes at a steep interest rate. Depending on the size of the loan and the company, borrowers could pay 15-30 percent as an annual rate.

The risks may be higher than taking a loan from a bank, but small business owners are inherently willing to take on risk when they see opportunity. This is what they do — who they are, even.

Whether this trend is good for the financial health of small businesses is for the owners to decide. But the shift is clear: Think easy, online, fast, flexible, mobile. When they’re ready to act, small business owners are now expecting their lenders to be ready, too.

Scott Brandt is vice president of marketing at SurePayroll, Inc. For more small business and payroll tips, visit our blog at

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